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The Fire Next Time

Fully three years after the passage of Dodd-Frank, the landmark legislation meant to end too-big-to-fail and mitigate risk in the financial system remains largely unimplemented.

As Nicole Gelinas points out in this month’s cover story (“How Financial Reform Became a Fiasco”), the behemoth law required regulators to set up some 400 separate rules, only a third of which have been finalized, while about two-thirds of rule-making deadlines have passed unmet.

So apart from whether Dodd-Frank is substantively good financial regulation, in practice its complexity obstructs its intended aims. As Gelinas writes:

“One of the law’s two fatal flaws was to assume that a complex financial system needs equally complex financial regulations, when the antidote is the opposite. A complex system needs simple rules. On America’s roads, you can go an infinite number of places for an infinite number of reasons, good, bad, and indifferent—but you must stop at red lights, no excuses.”

So it is the very ambition and complexity of Dodd-Frank that has hindered regulation of our still risky financial system, and this flaw has its dysfunctional equivalents in many other areas of American law and life.

For example, the Obama administration recently said it would delay implementation of its Affordable Care Act’s employer-mandate by one year. Whether one supports or opposes Obamacare’s policy aims, it is impossible to deny that its size and sweeping scope make it difficult to implement. Indeed, the employer mandate delay will increase costs and complicate implementation for other parts of the health-care law.

The size and ambitions of government, however well intended, have a chilling effect on business. Rankings of the business climate of states typically reveal states with the highest spending and largest bureaucracies to be at the bottom of the lists. Turns out that all that extra staff is not there to ease market conditions but often to dun businesses with fees, fines and taxes.

Where does all this end? The city of Detroit, now in negotiations over the biggest municipal bankruptcy in U.S. history, points the way. A once bustling and vibrant metropolis, America’s wealthiest city per capita in 1950, Detroit began to turn in the 1960s. President Johnson’s Great Society showcased Detroit as a “Model City,” pushing through progressive economic, labor and educational policies.

At the end of the day, though, Detroit has become a failed state where its once middle-class citizens can’t count on its government to keep street lights on at night or send police or paramedics to an emergency, and where vacant fire stations sit aside burned-down houses.

Dodd-Frank’s impractical complexity and Detroit’s dead utopian dreams bear sobering testimony to the idea that the overambitious claim defeats itself, and remind us that simplicity is indeed a virtue.

The French writer Antoine de Saint-Exupéry said it well: “Perfection is achieved not when there is nothing left to add, but when there is nothing left to take away.”

If we wait too long to start peeling unnecessary layers, Dodd-Frank’s model legislation will go the way of the model city. The fire station may be of no avail if the financial system is again ablaze.